Q1 2022 Navient Corp Earnings Call
Good day, and thank you for standing by.
Welcome to the Navient first quarter 2022 earnings call at this time, all participants are in a listen only mode.
After the speaker presentation, there will be a question and answer session.
Ask a question during the session you will need to press star one on your telephone.
Please be advised that this conference is being recorded.
If you require any further assistance please press star zero.
I would now like to hand, the conference separate your speaker today, Mr. Nathan Rutledge head of Investor Relations. Sir. Please go ahead.
Thanks, Brian .
And welcome to <unk> first quarter 2022 earnings call with me today are Jack Remondi, our CEO and Joe Fisher our CFO .
After their prepared remarks, we will open up the call for questions.
Before we begin keep in mind, our discussion will contain predictions expectations forward looking statements and other information about our business that is based on management's current expectations as of date of this presentation.
Actual results in the future maybe materially different from those discussed here this could be due to a variety of factors.
You should refer to the discussion of those factors on the Companys Form 10-K , and other filings with the SEC.
This conference call, we will refer to non-GAAP financial measures, including core earnings adjusted tangible equity ratio and various other non-GAAP financial measures derived from core earnings are.
Our GAAP results and descriptions of our non-GAAP financial measures and a full reconciliation to GAAP can be found in the first quarter 2022 supplemental earnings disclosure and is posted on the investor <unk> page at Navient Dot com.
Thank you and I'll now turn the call over to Jack.
Thank you Nathan good morning, everyone and thank you for joining us today and for your interest in Navient.
Our year is off to a strong start and we are excited to share with you. The results of another very successful quarter.
For the quarter, we earned <unk> 90, and adjusted core earnings ahead of our forecast and consensus.
Our earnings were driven by strong across the board performance.
For example, net interest income provision for loan losses fee revenue and operating expense all outperformed our forecast and contributed to this quarter's results.
Our ability to deliver consistently strong financial performance is a direct result of our focus on profitably building our growth businesses.
Actions, we have taken to minimize exposure to interest rate volatility.
Our focus on generating high quality assets and maintaining strong reserves for future credit losses.
Our constant efforts to improve operating efficiency and our disciplined capital allocation.
Our earnings generated a very healthy 21% core return on equity this quarter.
Administrating, our ability to consistently generate and deliver value for investors.
Okay.
With a very strong start to the year our success in managing in a volatile interest rate environment and.
And demonstrated agility and capturing opportunities for growth, we're raising guidance for full year earnings to $3 20 to $3 30 per share.
In consumer lending this quarter, we originated just under a $1 billion of new student loans.
Since the start of the year higher than expected increases in interest rates have decreased the potential value of refinancing.
In addition, the Biden administration extended the zero percent interest rate period on federally owned loans again.
Increasing borrower perception that this waiver will continue and that loan balances may be canceled.
These recent developments have and will continue to significantly reduce the overall demand for student loan refi products in 2022.
We do expect demand for refi loans will rebound once direct once direct federal loans returning to repayment.
We believe in the value and the long term potential of our refi products, which provide qualified borrowers with the ability to reduce their interest rate save thousands and interest expense.
And realize their financial goals as they pay off their loans faster.
We will remain disciplined in our focus on originating high quality loans that meet our return targets.
Our outlook for in school volume is getting stronger.
Now expect faster growth as we deliver high value products to students and families.
Our updated forecast for our combined new refi in the in school loan volume is $3 billion for the year.
In our bps segment. We are also more optimistic about our growth opportunities. This year as we leverage our pandemic related experience to secure new business.
We are seeing steady growth in our traditional services.
Our results this quarter provide a good example of our ability to leverage this experience to grow revenue and deliver high value for our clients.
Okay.
Credit performance has been stronger than our forecast at the start of the year.
The pandemic led to an unprecedented pause in federally owned student loans, helping people navigate the challenges created during the pandemic.
We also offered relief programs to our federal and private loan borrowers based on need.
As our programs ended we plan for elevated delinquency and default trends compared to pre pandemic levels.
To date these rates have remained below those pre pandemic levels.
While we have retained our prior higher loss forecast as we monitor the future impact of the end of that federal payment pause.
Portfolio performance to date and our outlook are very positive.
We successfully reduced operating expense by 14% versus the fourth quarter.
The reduction is the result of our ongoing business simplification efforts and the transfer of our department of education loan servicing business.
We expect to realize ongoing operating expense reductions as the transition services, we are providing and over the course of 2022.
Yeah.
Also contributing to this quarter's results and our outlook is our ongoing focus on operating efficiency.
Our capital management and allocation approach has delivered strong capital ratios and the capital needed to support our growth.
As of March 31st our adjusted tangible equity ratio was a very healthy 7%.
Consistent with our capital allocation plans, we returned $139 million in capital to investors.
22 million $24 million in dividends and $115 million in share repurchases.
We plan to complete an additional $285 million in share repurchases in 2022.
Our highly predictable capital generation will allow us to continue to meet our capital ratio targets, while we fund the projected growth in our business and complete our share repurchase plans.
We are off to a very strong start to the year, our focus on profitably building our growth businesses.
Successfully managing interest rate volatility generating high quality assets.
Improving operating efficiencies and our disciplined capital management is delivering value for our customers clients and investors.
I am pleased with our strong financial performance and I am excited and confident in our ongoing ability to continue to produce strong results.
I want to thank my colleagues for their efforts and contributions in a challenging environment.
Their commitment passion and agility helps navient deliver for our customers clients and investors.
Before I turn the call over to Joe I would also like to acknowledge board member Kate Lehman, who is not standing for reelection due to changing professional responsibilities.
He has been an outstanding board member and I. Thank her for her guidance and support to me the management team and the board.
And earlier this month, our board nominated Ed Bramson partner of Sherborne investors, our largest shareholder to the proxy slate.
Look forward to Ed joining the board subject to his election by shareholders.
With that I'll now turn the call over to Joe for more details on the quarter and I look forward to your questions later in the call. Thank you. Thank you Jack and thank you to everyone on today's call for your interest in Navient.
During my prepared remarks, I'll review, the first quarter results for 2022.
I will be referencing the earnings call presentation, which can be found on the company's website in the investors section.
Key highlights from the quarter beginning on slide four include first quarter GAAP EPS of $1 67.
First quarter adjusted core EPS of <unk> 90.
Originated $966 million private education loans.
Reported vps revenues of $94 million, while exceeding our high teen EBITDA margin targets.
Increased our adjusted tangible equity ratio to 7%, while returning $139 million to shareholders through dividends and repurchases.
I am pleased to report that the continued success across all of our business lines contributed to the strong quarterly results.
As a result of this quarter's performance and our revised outlook, we are increasing our EPS guidance to a range of $3 22.
The $3 30 for the full year.
This guidance includes using a rate scenario that is based on the forward curve as of April 14.
Which implies a fed funds target of 225 to 250 basis points by the end of the year.
And assumes that the cares act is extended to the end of 2022.
Let's move to segment reporting beginning with federal education loans on slide five.
Net interest margin increased seven basis points from the year ago quarter to 104 basis points.
As a reminder, our felt assets are primarily earnings also be daily reset index and are funded with liabilities largely reset monthly.
In this rising rate environment the benefit of this mismatch contributed to both the increase over the prior quarter and prior year and partially offset the loss of unhedged floor income.
As expected felt delinquency rates increased to 13, 5% and forbearance rates declined to 12, 9% from the year ago quarter with charge off rates at seven basis points.
The revenue Miss segment declined $20 million from the fourth quarter. This was attributable to October transfer of the department of education servicing contract.
This decline in revenue was more than offset by a $24 million reduction in operating expenses in the segment.
Let's turn to slide six and our consumer lending segment.
In the quarter.
<unk> $941 million of private education refi loans this quarter saw a decline in demand with the extension of the cares Act and higher interest rates on new refi volume.
The most recent extension of the cares Act now provides a zero percent interest rate for borrowers through August 31 2022.
While this latest extension is scheduled to end in August our guidance anticipates. The cares act will be extended form eight time through the end of the calendar year.
Sure.
Since its announcement in March of 2020 borrowers a federally held loans have not been required to make any payment.
From this combination of factors, we expect to see quarterly refinance originations for the overall market that are about half of the first quarters. We are well positioned to continue to hold our market position, while maintaining our target margins and expect to refi approximately 50% lower quarterly volume compared to the <unk>.
First quarter's originations as borrowers with federal loans delay refinancing decisions until after the extension ends and the rates on current loans moved from zero percent to their higher original stated rate.
The exploration of the moratorium should be a significant tailwind for the refi origination backdrop, even as rates rise.
The loss of expected net interest income in the year from this volume is offset by the benefit of the expected decline in the provision for new loans.
As a reminder, we reserve for expected loan losses at origination.
So for every dollar of new refi originations, we reserved approximately one in a quarter percent.
This quarter's net interest margin of 280 basis points was four basis points higher than the fourth quarter, primarily as a result of the decrease in interest reserve for late stage delinquencies as fewer borrowers entered late stage delinquency compared to the prior period.
While credit trends continued to exceed our expectations with total delinquency rates below pre pandemic levels, we expect charge off rates to rise back to more normalized levels that are in line with our guidance of one 5% to 2% for the full year.
Our life of loan allowance reflects the uncertainty related to the potential negative impact to the portfolio from the end of various payment relief and stimulus benefits that recently occurred or that we currently forecast to end in 2022.
Feel confident that we are adequately reserved for the expected life of loan losses, given the well seasoned and high credit quality of our portfolio.
Let's continue to slide seven to review our business processing segment.
First quarter revenues totaled $94 million with increasing revenue from our more traditional government and health care bps services, partially offsetting the expected wind down of revenue from pandemic related services in the quarter.
We continue to provide dynamic solutions that meet emerging market demand and maintain a positive outlook on our ability to secure opportunities in this space.
Our ability to leverage our existing technology enabled platform and infrastructure contributed to the 20% EBITDA margin in the quarter exceeding our high teen margin targets.
Let's turn to our financing and capital allocation activity that is highlighted on slide eight.
During the quarter, we reduced our share count by 4% through the repurchase of 6 million shares.
Turning $139 million to shareholders through share repurchases and dividends, while increasing our adjusted tangible equity ratio to 7%.
At today's price are planned purchases for the remainder of 2022 of $285 million, we've reduced our outstanding share count by an additional 11%.
During the first quarter, we issued $952 million of private education refinance loan ABS.
While spreads have widened across all asset classes, we continue to see strong demand for our ABS due to the high quality of the underlying assets.
And mitigate the risk of rising rates on our refi portfolio.
By hedging our expected loan volume originations and issuing fixed rate securitization locking in margins for the life of each loan.
These actions have benefited us in recent quarters as rates continue to rise, allowing us to achieve our mid teens return on equity targets in the volatile environment.
Let's turn to GAAP results on slide nine.
We reported first quarter GAAP net income of $255 million or $1 67 per share compared with net income of $370 million from $2 per share in 2021.
Turning to our outlook for 2022 on slide 10.
Our continued focus on efforts to simplify the business, while improving efficiencies in the face of a challenging macroeconomic environment allowed us to achieve an overall efficiency ratio of 51% and core return on equity of 21% in the quarter.
The updated 2022 adjusted core earnings per share guidance of $3 20 to $3 30.
Is an increase of 6% compared to our original expectations.
This updated outlook excludes regulatory and restructuring costs.
Assumes no gains from loan sales or debt repurchases reflects a continued rising interest rate environment and the extension of the cares Act through December 31 2022.
Before I turn to questions I'd like to welcome back the thousands of Navient teammates, who have returned to the office and recognize all of my teammates whose efforts to serve our customers throughout a challenging environment contribute to the continued success and positive results in the quarter.
Thank you for your time and I will now open the call for questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone.
That would be star one on your topic.
We have our first question from the line of Mark Devries with Barclays. Your line is open.
Yes. Thank you.
Maybe a question for Joe both yourself private NIM margins are tracking higher than kind of your full year. Your full year guide can you just give us a little more color on how youre thinking about that trending over the course of the year.
And so certainly it is just one quarter. So we didn't update our targets for the full year, though we did update.
Full year EPS, we feel very confident about the results, we just delivered and our ability to meet or in some instances exceed the expectations of the guidance that was laid out at the beginning of the year I would say that the rising rate environment and the mismatch that I described on the <unk> portfolio that we do.
Do have that benefit as rates rise we pick up.
Benefit on the assets as they are resetting daily and liabilities are resetting their monthly or quarterly. So there is that pickup that we obviously weren't forecasting nine hikes when we came into the year.
Year end earnings that is going to offset the floor income on the private NIM side, the stability that you've seen and the beat versus where our forecast was that part of that has to do with just a general slowdown that we're seeing in prepayments. The other piece that I would say is that from.
A delinquency perspective, we saw less borrowers entering into late stage delinquencies, so youre not putting up a reserve against that interest as they enter into 90 day, plus so again, that's a pick up in the quarter versus what our expectations were and that's part of the overall theme that we are seeing credit that is better than our.
<unk>.
Got it.
And then <unk>.
<unk> for Jack.
The private student loan originations kind of coming in lower than you were expecting at the beginning of the year just given the extension of the cares Act and what's happening with rates, how should we think about how youre going to deploy the capital that that frees up.
Yes, certainly.
<unk>.
The pause that has occurred in the federal direct loan portfolio, we've kind of looked at zero percent interest rates has been a challenge to compete with when it was temporary and.
And as the perception changes in actual actions have kind of extended that indefinitely.
It makes it even a little bit it makes it much more challenging.
This year.
The impact is relatively modest, but we would certainly look at our capital ratios.
Are they expand what we expect loan volume to be in future periods, and then make decisions about where best to allocate that capital certainly the the last time, we would want to see is that it would sit on the balance sheet.
Underutilized.
And so we will revisit that as our.
Our forecast and expectations for loan volume about 22, and 'twenty three begin to materialize and take shape.
Okay and does the commentary you provided on kind of expectations for repurchases to render the youre already kind of contemplated this dynamic.
Are they kind of they contemplate the extension of the cares act through the end of the year.
And.
This perception that will end up with.
Zero percent interest rate will continue.
As you know the buy in administration and extended it through the end of August we're assuming it's going to continue through the end of the year.
And there is this growing perception that loan balances from borrowers are going to be transferred from the student borrower to taxpayers, alright, and thats that is definitely out there as well.
Okay got it thank you.
Thank you. Our next question is from the line of Sanjay <unk> with J B W. P.
Go ahead.
Thanks, Good morning, Jack can we just touch on that point you just made could you just talk about.
This loan forgiveness potentially there's some big numbers being thrown out there how does that impact your your business.
Well the biggest place.
What they are proposing here is effectively transferring the loan balances that are outstanding from student borrowers to taxpayers in general.
And.
There are no specific proposals on the table.
This concept on perception, you certainly have <unk>.
Certain members of Congress proposed making making certain recommendations, but theres no.
Statutory proposed legislation or nor is the administration issued any specific.
Our plan there as well. So this is more of a perception issue.
And what it does is it causes borrowers who have graduated in May may have look to refi their loans to sit and pause while they wait and see what the administration may or may not do here. So.
So that's the biggest impact is the biggest driver that we see obviously the zero percent interest rate and the fact that that keeps extending.
Is it competing factors there is a large competing factor as well in terms of.
Impacting overall demand for refi loan volume and not just at Navient.
Across you know across all of the industry here.
And I guess, when we think about <unk>.
Potential paydowns of balances if there is forgiveness I mean, how.
How does that affect your pool effective.
As a whole.
Again, there are no proposals so it's a little hard to know exactly what would happen. Most most of the administration's activities to date have focused on.
Loans owned by the Department of Education directly.
And so it is not clear.
What would happen to portfolios of federal loans are private loans that are outside of that sphere, but.
Obviously, there would be no.
There is debate as to whether or not this is capable of being.
Enacted by administrative Fiat or.
Whether or not it needs to go through some form of legislative process.
It does seem a bit ironic that.
A single individual could choose to spend.
Hundreds of billions of dollars of taxpayer dollars without oversight from Congress.
I'm not a constitutional lawyer.
There's never a dull moment there just one follow up Jack you also mentioned the sherbourne representing that potentially joining your board and obviously they've amassed a sizable position in the company shares could you just talk about any.
Any intentions that they've stated.
On your part thanks.
Yes.
Well I think the.
Specifically, you probably would want to I don't want to speak I don't want to speak for Ed or for sure born here, but all of the dialog and activities to date have been extremely positive and constructive.
I would say they see the opportunities very in a very very similar way that this is a company that has that generates a significant amount of capital.
We see significant opportunities for growth in some of our of our certainly in our core areas that we've identified with loan origination and bps.
And.
How can we best execute that.
I think there's definitely a share also a shared view that capital reinvested in the business generates more value for shareholders in the long run than does capital return.
Obviously, we follow a disciplined approach of.
Our first priority is being able to reinvest capital that we generate back into the growth opportunities that we see.
To the extent that those are not available we want us of course.
We need to support our dividend and then any additional capital that remains is returned to investors through through share repurchases, but.
Our first interest is of course reinvesting it at attractive returns.
Turns in the in the business.
Okay. Thank you.
Thank you. Our next question is from the line of Marsh Orenbuch Credit Suisse. Your line is open.
Great. Thanks.
I guess given the.
<unk>.
The uncertainty both around debt forgiveness in the.
The moratorium, which may not be a moratorium, maybe a removal of interest payments.
Should we think about the refinance business in 2023.
Also given two other factors you'd be at a higher level of kind of market interest rates.
I know you talked a little bit about the.
That still ability to access the ABS markets given the high quality nature of the collateral but spreads are wider also so could you just talk about from both standpoints.
The level of demand and.
The industry's ability to given the changes in the financing markets how that might impact.
The reinsurance market in 2023.
Sure. So if you look at the.
Look at the universe of what is the potential opportunity for <unk>.
Borrowers to refinance it comes from.
Primarily.
Federal direct student loan portfolio and more likely than not those students who have borrowed under either the grad plus program or unsubsidized Stafford loans, where the interest rates are higher or big benefit in that business as new volume is generated every year and it's generated at market rates so as interest.
Rates rise our nu.
New supply is being generated in that in that space and as those students move through school and graduate.
And obtain employment they create opportunities.
That they have earned to lower their interest rate by they're better credit and.
And income capabilities.
The other area is private student loans the in school student lending marketplace is priced.
Very differently than the refi marketplace for their reasons.
The two biggest risk factors are unknown at this point will the student graduates and will their income be sufficient to service their debt.
In the refi space you know both you know the answers to both of those questions and so you were able to again.
Return a lower rate to the borrower based on the fact that they've earned it through obtaining their degree and.
Getting the job they need to support their in service date, yet so the long term outlook here is in our view very positive that this is just an interest rate related issue, we would definitely see some ebbs and flows and demand.
But the big impact that we're seeing here is driven more by policy positions that are not economics.
Driven they're more politically driven at this point.
And we will have to see how that unfolds between now and.
The midterm elections, probably in November .
And the other the other side of that in terms of that.
The increase that you would expect to see in your own cost of funds to access that market.
Well certainly I mean, all of those factors come into play right rising interest rates most of that most refi loans are fixed rate.
Rockford is fixed rate loans, and so certainly the rising a rising rate means the coupons that we need to charge for to refinance borrowers is certainly higher than it was a year or two ago.
And to a lesser extent.
As credit spreads widen here.
And they have widened in the beginning part of this year that gets translated into higher coupons as well.
If you look at our credit performance in our portfolio. However, I think what Youre seeing is the opposite trends is that credit performance is extremely strong and that strength and the ability to persist and that strength in kind of a more challenging economic environments.
We think the product just gone it will be well received by.
A good asset for US and then also well received by our ABS investors and I would just point out Moshe in the past.
Refi business not something that's that's completely new to Navient for years ago, we offered.
Private loan consolidation opportunities for borrowers and so we've got 40 years of history of how consumers who have graduated from school with a degree within income how they have performed in different rate environments in different economic environments and the performance.
<unk> there has been consistent and outstanding and that's really reflected in the.
The capital that we allocate to this business the loss forecast that we assumed and the rates that we offer to the consumer.
Got it.
Separately, you were able to extract expenses this quarter given the changes in the servicing just maybe.
The plans over the balance of the year anything we should be aware of something on the expense front. Thanks.
Yep, well operating expenses actually declined.
The fourth quarter really across the board. So if you look this stay declined by almost $33 million about 12 of that was related to the department of Ed contract. The balance came from other areas of the company.
As we gained operating efficiencies.
And there are different business.
Volume mix, that's going on.
First quarter is also a seasonally high expense month for us as all of the.
<unk>.
Some of the costs associated with some of the compensation plans that take place. After yearend are are are booked in the quarter due to vesting issues and things of that nature. So we would expect operating expense to continue to be.
To outperform our expectations that we laid out at the beginning of the year.
Certainly the lower loan volume will be a contributor to that as well.
But certainly and I did mentioned as well that there are some transition services that we're providing.
Two are.
To the entity that took on the department of Ed contract and those will wind down during the course of the year.
Thanks Jay.
Mhm.
Thank you. Our next question is from the line of Bill Ryan with Seaport Research Partners. Please go ahead.
Good morning.
Couple of questions, just with the curtailment and the refi outlook.
So if I made an announcement a few weeks ago as well about their expectations are you seeing any additional efforts and the in school channel and again thinking back to so far I believe they are trying to make some inroads into the in school channel.
In light of the curtailment of refi activity.
And then secondly, you mentioned that the volume reduction outlook that you provided was a combination of higher rates versus the payment and the payment moratorium.
Don't know if theres any way to kind of distinguish.
The production and the outlook between those two factors. Thanks.
So.
On the in school side of the equation. We view these are very different markets when you're marketing to.
New college students and families in the either your marketing to graduate school students. So we run them.
Separately with different product managers and different campaigns of that sort.
What we are excited about is really the opportunity to continue to leverage the <unk>.
The origination flow process that we've developed and which we think is easier for both students and families, particularly as you invite a cosigner into alone.
But we've also been building capacity.
Other areas that help students and families.
Kind of.
Better finance their higher education objectives. This means minimize the amount that they have to borrow.
We offer for example through one of our subsidiaries the opportunity to apply for scholarships that are the only scholarship platform.
Both nationwide and local.
Related scholarships.
It has an application that allows students and families too.
To simplify the app with the completion.
Completion of the vascular form which is.
Pretty complex federal form on its own.
And then more recently we've began.
Offering an opportunity for families to load the information that they received from their schools. Their offer letters. If you will for acceptance that detail out how how much it's going to cost and how the school expects them to pay for it to be able to compare those offers from one school to an X on a more of an apples to apples basis.
Yes.
Rules don't package all of that information in the same way and so it is can be a complex task for folks those combination of activities are driving an expectation that we will see higher demand for our in school loan products.
In this upcoming academic year of 2022 2023, so we're very optimistic about that.
To your second question, it's a little hard because I mean at the end of the day.
Tumor is deciding not to pursue a refi loan.
It's hard to know whether how much of it is rate but.
I said earlier in the call.
Zero percent is tough to compete with and and that's what we're looking at year zero percent. So as long as that continues to get extended I think thats going to continue to be the biggest barrier, we see in <unk> demand.
Alright, Thanks, Jack for Federal Department.
Sure.
Thank you very much.
Or if you would like to ask a question you will need to press star one on your telephone.
Again that would be star one on your telephone.
Our next question is from the line of Rick Shane with JP Morgan.
Good morning, everybody. Thanks for taking my question.
I wanted to look at the guidance a little bit and the.
Net and the underlying metrics when you look at them. Obviously, you Havent changed at this point any of the key assumptions, but you've raised guidance.
I suspect some of this is confidence versus.
The previous metrics because of how strong Q1 results were.
And I'm also curious can you talk a little bit about attribution how much of the differential in increasing earnings guidance is a reflection of lower provision expense due to lower volume.
And so I'll take that Rick and good questions I think.
Answering your last question first so in terms of the provision as we said in my prepared remarks, I would anticipate as a reminder, we reserve one in a quarter percent for all new loan originations on the refi side. So if you think about for every billion dollars what that represents roughly $12 5 million and term.
A provision the lowered expectation is then offset by the fact that we arent going to be earning net interest income off of those loans. So over the course of the year based off of the timing of when we were expecting those loans they roughly offset one another for the full year.
And then for the rest of the guidance while it is certainly I would say.
We are in a very good position. It is a challenging environment that we're looking at over the next year in a volatile environment, but we feel very confident based off of what we saw first quarter results that we've moved to really.
That 6% EPS range is a reflection of being more confident in hitting sort of those higher end ranges, so either meeting or exceeding.
So this was a beat across the board. So this isn't pointing to just one specific item. So raise that target guidance. So I really feel that it's a reflection of the confidence in front of this challenging environment.
Great. Okay. That's very helpful. Thank you.
Thank you. Our next question is from the line of Baku, a broker with Goldman Sachs. Your line is now open.
And Mark Congrats on the.
Quarter and thanks for taking my call.
With respect to the capital allocation can you guys help us understand sort of the timeline of when or how you intend to deal with the upcoming 2023 unsecured maturities I'm just trying to get a picture of sort of the sort.
The cadence as we approach 2023, I know, there's quite a bit of time between now and then.
And so we have a 1 billion of maturities coming due here in January we are well positioned from a liquidity standpoint to meet that with cash on hand, and future cash generated so as you've seen in the past we have been opportunistic in terms of buying back debt early if it makes economic sense so to.
The extent those opportunities present themselves, we would take advantage of that but we do not have any debt repurchases in our planned guidance here for the remainder of the year.
Perfect. Thank you so much for that color.
Just as a follow on.
What are the puts and takes I saw that the fell 30, plus day delinquencies picked up a bit on a quarter over quarter basis is this just the fact that you've got.
You were able to get borrowers are part.
Out of the forbearance and some of them slipped into the juice.
Yes so.
When we win when the pandemic hit like the Department of Ed, We offered payment relief options to borrowers and so.
Borrowers did you take advantage of those non payment periods and as we if the pandemic ended in the economic environment continued to improve.
We work with borrowers to return them to repayment. If you look at our delinquency rates in both our federal and private loan portfolios private are clearly below pre pandemic levels.
Federal if you look at historic averages were right in line with where you typically see delinquency and default rates on the federal book over a normalized period of time.
So nothing unusual there just they just look like they are significant increases because theyre coming off artificially suppressed levels.
Yeah, that's what I thought and given the fact that you're basically a steady state.
We shouldn't expect any sort of big variation on a go forward basis.
Alright.
Perfect and moving on I saw that there was like a $20 million sort of decline in other revenue if thats sort of also related to the.
So the innovation.
The department of Education contract.
And obviously your cost your underlying Opex also declined by a significant amount is that fair to say.
So I would say roughly half of that is related to the duration of the contract and you can see that in the other income line on the federal Education segment. The other pieces the decline in the asset recovery section within the federal education loans grew 12% to three and that's just mainly a function.
<unk> of the extension of cares Act as we've seen a decline in third party collections on self loans, which is baked into our guidance that assumed run rate of roughly $3 million.
Got it got it.
And final question, sorry, and then to your second part right. So we've reduced expenses associated with both of those activities and.
<unk> exceeded the revenue that we lost in terms of the total expenses removed absolutely I saw that and I just wanted to clarify on it. Thank you so much for that and lastly.
Terms of the expenses on a go forward.
You guys are signaling that you still have more expenses that can potentially come out given that first quarter is the highest expense quarter is there a way to kind of quantify the cadence or the magnitude of the potential opportunity here and the cost out somewhere in the Microsoft three quarters.
And so we're not getting that specific but we do expect it to be lower with each quarter here as Jack said in his earlier comment that the first quarter is historically high but we would anticipate continued reductions throughout each quarter to end the year.
Thank you so much caution however.
Great rest of the year.
Thank you Kim.
Thank you. Our next question is from Giuliano Bologna with Compass point Your line is open.
Good morning.
Come back to a little bit of a topical.
A couple of times already.
Thinking about the origination guidance Youre also taking the volume down roughly $4 billion.
I run.
100% that comes out to an after tax number around 30%.
Million.
Yes, there's probably some into loans in there as well.
Yes, the question with that is.
What you're effectively saying is the offset there because you should get the benefit of not having to provision.
On those loans.
We offset by or would have been offset how do you originate those loans by the NIM and the year.
And then the next question is how do you kind of adjust for that going into 'twenty three because obviously your portfolio will be a little bit.
Mauler going into 'twenty, three and you'll probably have now pushed off in origination that will be great.
On a similar impact or kind of the opposite impact from 'twenty three.
Can you return more capital in the near term or using your capital to kind of offset some of that impact.
So that's the right way to think about it for 2022 in terms of the offset from the NIM versus the provision and obviously, we'd rather have these loans on our books and hold them for a longer period of time I think to Jack's point the great unknown.
When does the.
Percent extension actually end here and how to think about that is that there would be a significant we believe there could potentially be a significant wave as borrowers move from zero percent to higher stated rate. So just thinking about that opportunity ahead that would put pressure.
Sure on the provision earlier in the year, but I.
I would say the earlier that that would occur the better the benefit that is to us in terms of net interest income for the full year. So absent of that coming back I would think about next year's balances are ending this year I would say is relatively flat on the private lending side as we would anticipate just naturally prepayments.
Slow in a rising rate environment as borrowers have less of an opportunity to refinance the loans.
That's great.
And what I was curious about was.
We got the.
So I think.
Obviously, our servicing revenues come down a lot.
All 11 million of other income I'm curious if there's anything that's related to or does anything recurring that you're referring to other income.
So that 21 to 11 is really a reflection of the wind down of the transition services agreement that we have in place and it relates to the innovation of the department of education servicing contract so that should ultimately.
Go away by the end of the year and that $11 million is offset by expenses associated with that contract. So those expenses should be removed as well.
That sounds good thank you very much.
Okay.
Thank you.
Next question is from the line of John Hecht with Jefferies. Please go ahead.
Hey, guys good morning.
Most of my questions about education lending have been asked so maybe just a quick.
A quick moment on the business processing segment.
Your standing you guys have been talking about the kind of run off of Covid related services, maybe give us a sense for the cadence of that and then you talked about health care and other kind of segments within that category doing well, maybe just give us an update on that stuff too.
So youre right I mean, the Covid related project work that we took on.
Over the last two years has for the most part bin.
Has run off at this point there are some small.
Components that trailed into the into the first quarter, but we're really seeing here is an opportunity to replace these with more with longer term arrangements.
Really driven by the fact that we've been able to demonstrate to our clients the value of what the services that we provide.
So it's more than just meeting increasing demand. It also helped.
Help provide more a greater insight into different components of their business activities and a view that between the combination of processing efficiency that we brought in data insight, we were actually adding incremental value across a number of different activities. So we are expecting to see.
See.
And realize new business opportunities as a result of that service experience and then our traditional businesses, particularly in healthcare a lot of health institutions also paused in terms of restructuring are taking a look at their business operations to determine what could be more efficient.
<unk> for them during the pandemic and as the pandemic has.
Has has.
I guess Wayne or maybe become more normalized.
Most of those hospitals are now re looking at different opportunities.
Well as.
So we're winning new contracts in that space, but there are also seeing higher revenue structures. As there has been a return to elective procedures et cetera that are driving demand for our services. So we're very optimistic about the outlook and vps across our different business activities.
And I'm really looking forward to continue to demonstrate the value that we bring to our clients from both.
Processing efficiency as well as our performance effectiveness side of the equation.
Great. Thanks for the color.
Okay.
Thank you I'm showing no further questions at this time Mr. Rutledge. Please continue.
Thanks, Brent I'd like to thank everyone for joining us on today's call. Please contact me. If you have any other follow up questions. This concludes today's call.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
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